Spotify Board Member Google Gets Nailed by Stockholders for Another $250,000,000 in Drugs Case

Google has entered into a proposed settlement agreement with a group of Google shareholders that sued Google’s top executives and board members for breach of fiduciary duty, abuse of control, corporate waste and unjust enrichment. Google agreed to spend $250,000,000 over the next five years to improve its controls over selling advertising for illegal drug sites (this is in addition to the $500,000,000 fine that Google paid to the government that started the shareholder suit).

Google Inc has agreed to create a $250 million internal program to disrupt rogue online pharmacies as part of a deal to end shareholder litigation over accusations the search company improperly allowed ads from non-U.S. drug sellers.

Google said it would make content about prescription drug abuse more visible and work with legitimate pharmacies to countermarketing by rogue sellers, documents filed in an Oakland, California federal court on Thursday showed.

Google will allocate and spend at least $50 million a year to the internal effort for at least five years under the settlement. The company has also agreed to pay $9.9 million in fees and expenses to plaintiff attorneys.

How did this happen?

It all started in 2008 when former Secretary of Health and Human Services Joseph A. Califano, Jr. wrote a letter to then Google CEO Eric Schmidt. Secretary Califano implored Mr. Schmidt to do something about Google’s profit from selling advertising inventory to websites selling prescription drugs illegally.

Secretary Califano got no reply from Google.

Looking back, if Mr. Schmidt had just taken action on Secretary Califano’s letter, the smartest guys in the room could have saved themselves $750,000,000. That’s 3/4 of a billion which is real money even in Silicon Valley. And not only would they have saved themselves a pile of money, imagine how much human misery might have been prevented–if not deaths–from Google users who were sold illegal drugs through Google’s advertising.

I wonder if anyone who follows Google will be surprised by this in 2014. But in 2008, it would not surprise me that even a former Cabinet secretary could not get anyone in the press interested in this story, and frankly not much has changed on that score.

But what did change is that Google was the subject of an extensive sting operation by the U.S. Attorney for Rhode Island, the FBI, FDA and the IRS over several years on essentially the same question that Secretary Califano tried to raise to Mr. Schmidt in 2008. Google was then the subject of a grand jury investigation in Rhode Island during which it produced 4,000,000 documents.

The U.S. Attorney for Rhode Island, then Peter Neronha, disclosed that his investigation demonstrated that the highest levels of Google’s management–including Larry Page–knew that Google was profiting from selling advertising for illegal sites that indiscriminately sold prescription drugs without a prescription, including some drugs that not only required a prescription but that were to be administered in a doctor’s office.

And you will find videos for illegal drugs on YouTube right now. Not to mention videos like this:

During the course of the Google Drugs grand jury, Google’s lawyer in the matter, Jamie Gorelick, was able to negotiate a “non prosecution agreement” with the U.S. Department of Justice. A non prosecution agreement is a kind of plea bargain, although it isn’t really a plea bargain because the defendant has not been charged yet. It’s the kind of thing rich people or big corporations get so they can keep from being charged with a crime. You know–getting away with it. It usually involves the payment of money. And Google’s case was no different.

Google paid a $500,000,000 fine to get away with it, which at the time was one of the largest corporate fines in the history of the United States. You would have thought that Attorney General Eric Holder would have wanted to tell the world how he got Google (that would be the same Eric Holder who took over as Deputy Attorney General when Google’s lawyer Jamie Gorelick vacated the post in the Clinton Administration). As MTP readers will recall, the AG stayed far away from the news. Aside from speaking at a White House soirée celebrating all the good Google was doing with the online drugs issue while Ms. Gorelick was likely negotiating the no prosecution agreement alongside ELI keynote invitee and Google General Counsel Kent Walker.

Mississippi’s Hood, a Democrat, said the relationship between Google and the White House may have led the administration to help soften the company’s public relations blow by playing down the announcement of the fine. Schmidt, now Google’s executive chairman, has been a campaign supporter and adviser to President Obama.

“I don’t think the Department of Justice was allowed to promote it the way they would some other $500 million fine,” Hood said.

But here’s the twist–the conduct that was at issue in the grand jury investigation was not really Google’s corporate conduct, because that conduct was outside the scope of the authority of Google’s executives. Because that conduct was, you know, whatchamacallit. Criminal.

So when Google’s top executives approved writing that $500,000,000 check to keep from being criminally prosecuted, they were causing Google’s stockholders to pay for what was arguably a fine that should have been paid by the executives out of their own pockets because it was a fine for their conduct in their personal capacity.

Remember the stockholder’s lawsuit had claims for “breach of fiduciary duty, abuse of control, corporate waste and unjust enrichment“? If you take the corporation’s money and use it to save yourself some money, like for example if you authorized the corporation to pay the biggest corporate fine in U.S. history that was really because of something you did wrong, you are enriching yourself at the stockholders’ expense.

And that’s a big no no.

Also remember that Google has rigged the voting power of stockholders so that it is only theoretically possible for stockholders to ever vote to replace any of the top executives or the board. Eric Schmidt, Larry Page and Sergey Brin has stock that gives them essentially a 10 to 1 voting advantage over any other Google stockholders. They like it this way and it’s always been this way. But you know what else that means?

When they make a decision to use the stockholder’s money and the Google board approves it, they better hope they got it right because if they don’t they only have themselves to blame. And sometimes those uppity shareholders will sue your ass.

As they did in the case of Google Drugs.

Google’s board and executives settled the case and didn’t have to pay back the $500,000,000. That’s a pity. They did not admit wrongdoing. But then they didn’t admit wrongdoing in the nonprosecution agreement, either. If they’re not guilty or liable, then why did they pay out $750,000,000 for something that wasn’t illegal? That’s a pretty big number.

Think about where this leads and all the many things Google has screwed up. What we know is that there is a group of stockholders that are willing to sue the board and executive team–who are definitely in control of everything that happens at Google.

And we know that they have now committed to their stockholders that they’ll do better.

Anyone in the music business has heard that song before, especially when it comes to Google driving traffic to illegal sites with advertising sponsored piracy that Google profits from. After 10 years of Google, what we know is that if they say the Sun rises in the East, you would do well to check it out. Nobody can figure out what they are doing on the Spotify board and why they were invited to speak during Grammy Week. If their lips are moving, they’re lying.

But this time they didn’t make the promise to do better to a bunch of hippie freak musicians who they don’t care about. This time they made it to their stockholders.

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Hi Chris, Was a little confused about the shareholder suit and the numbers in the article. Is there a way you could clear up the other 250K. I’m assuming that is what was paid out in the settling of the stockholder suit. Paid to whom? The attys generals? Maybe the terms of the agreement we’re not disclosed. Thanks Bob